Part-time CFO | Entrepreneurs Can Increase Cash Flow Using Dividends
One of the most significant issues that businesses face in Canada say is running out of money says part-time CFO. Half of all entrepreneurs end up failing in their business before reaching the five-year mark, and 29% of those entrepreneurs say the reason why their business failed was because they ran out of money in their business. Business owners can impact how much cash flow they have in their business a variety of ways, but one of the most effective ways is through efficient tax strategies and business planning.
Many entrepreneurs donít understand that the decision of how they take money out of their business ends up being a tax strategy. Many entrepreneurs take money out of their business, they can take money out of their business using one of two methods, salary or dividends. While many business owners think that they can just write checks and take money out of their business tax rate, they do have to attribute in their year end how much money they took out, and what method it was put towards. Part-time CFO says entrepreneurs need to understand the difference between the two. Salary is taken out of the business and it does show up on the income statements of the business because it is deductible. Salary is taxed at a personal tax rate that can top out at about and 48%. Dividends on the other hand are not deductible from the income of the corporation, because they were a direct withdrawal from the prophets of the business and get taxed at 11% small does this tax rate.
The decision on how business owner should pay themselves is not necessarily as easy as which one has the least amount of taxes associated with it. If entrepreneurs donít pay anything to themselves in salary throughout the year, they may have to end up paying back taxes to Canada revenue agency since they didnít pay any taxes throughout the year, if they pay too much to themselves in salary, they end up paying the 48% personal tax rate which is a lot of taxes. If a business owner pays salary they also have to pay CPP for example. And ultimately, accountants need to ask a bunch of questions to factor in all of the different variables that makes sense.
Some of the different variables that business owners need to discuss but there part-time CFO in order to come up with the most efficient tax strategy possible include if the business owner has spouse, does this most earn their income, and how they take it through salary or dividends, does the business owner take unrelated income in salary or dividends from sources other than the business, is there any income splitting happening? Didnít have any children, do they pay for childcare are either one of them going through divorce or separation? All these things factor into a business owner needing a professional to help them create an efficient tax strategy. Part-time CFO | entrepreneurs can increase cash flow using dividends
Some of the most important decisions that a business owner will face in their business, is creating an efficient business plan that includes a great tax strategy to help them minimize the amount of taxes that they pay in their business says part-time CFO. Since 50% of all entrepreneurs fail within five years, and 29% of those entrepreneurs who fail say that the reason why their business had to close was because they ran out of money. By creating efficient tax strategies in their business, business owners can significantly impact whether or not they are able to increase the cash flow in their business.
When they start their business, many business owners think that they can save money by hiring very inexpensive part-time CFO. This usually backfires on most entrepreneurs because the more they save on accounting services, the more they usually end up paying in additional taxes. A great business plan with an efficient tax strategy can save the business over thousands of dollars a year, theyíre better off paying for a great accountant who can help them do that from the very beginning.
Business owners should be very mindful and wary of any tax professionals who say that they can answer the question of how business owner should get paid in salary or dividends very easily, or without properly understanding the business owners situation or the circumstances of the business. Part-time CFO says it is an extremely complex issue, that needs a lot of information being gathered and understood. Some tax professionals believe that the salary, dividends and corporate tax rates are integrated. Part-time CFO says that while that is a strategy that works in theory, and practice it doesnít work because there are many more variables than that theory allows for. The way it works is since dividends are deductible, an entrepreneur pay the personal tax and corporate tax. If they add together both of those tax rates together it should equal the amount on the salary. If any entrepreneur hereís this theory, they should realize that the person thatís giving that advice is not to take the time to properly understand their business.
However, the part-time CFO and accountants at Spurrell and Associates have spent years creating and perfecting their business plan that can help them get as much information from their clients in as efficient manner as possible. Once they have all of the necessary information, they also have processes in place for creating business plans and tax strategies using that information. This can help them get great results efficiently as well as repeatedly, that a minimal cost and it will cost if they were doing from scratch.
By working to create a great tax plan, business owners can save thousands of dollars every year, that they can then put towards increasing the cash flow in their business and help themselves avoid the reason why many business owners fail.